Starting a new business or managing a mature business can come with significant opportunities, as well as challenges. This article will focus on the long-term planning issues that are critical to your personal and professional success as a small business owner. Every decision is yours to make from creating a business plan, creating a budget to investing in your future. We often find business owners struggling to balance the short-term decisions of investing and growing a business, while deciding what to invest into their long-term retirement plans.
Often, individuals equate investing in their business as their sole retirement plan. A study done by Guardian Insurance Company (guardianlife.com/s3fs-public/sbo-retirement-readiness.pdf) found that many small business owners plan to rely heavily on the success of their business to fund their retirement, which may be risky. Unfortunately, nearly half of small business owners don’t feel well prepared for retirement. As a business owner myself, I view my time as well as the intellectual and financial capital commitments I make into my business as a part of my retirement plan, but this is just part of the plan. My hope is that these efforts create a future revenue stream for me by way of a transaction (i.e. selling my business) or continuing to earn revenue from the business as part of a succession plan. As I say, this is only part of the plan; one other necessary component of a comprehensive financial plan, includes a strategy for retirement savings. This ensures that as a business owner, you “pay yourself first”, that is to save money outside of the business, before other expenses. If saved in the proper retirement plan, it may help significantly reduce your taxes and grow your wealth to live a financially secure future.
There are several different types of retirement savings plans, so deciding which one is best for you and or your employees can tend to be overwhelming and is very personalized. The questions and chart below will help you focus on a few simple questions to help guide you to the right plan for your business.
Question 1:
Do you have any employees, other than you and your spouse?
If NO; select one of the options below:
SOLO 401k
If you value maxing out your savings as much as possible while reducing your current income for tax savings, a SOLO 401k Plan is for you.
SEP IRA
If you value a simple, no frills and low cost plan a SEP IRA is for you.
If YES; move onto question 2.
Question 2 – You have employees:
Are you willing to contribute to your employee’s retirement savings accounts?
If NO; select one of the options below:
401k
If you value maxing out your savings as much as possible while reducing your current income, a 401k Plan is for you.
IRA
If you value a simple, no frills and low cost plan an IRA is for you.
If YES; move onto question 3.
Question 3 – Employee and Employer will contribute to plan:
401k
If you value maxing out your savings as much as possible while reducing your current income and flexibility a 401k Plan is for you.
SIMPLE IRA
If you value a simple, no frills and low cost plan a SIMPLE IRA is for you.
In short, there are many retirement options available to small businesses. It can be overwhelming trying to navigate the decision by yourself. Among the small business owners in the Guardian study who feel they are on track with their retirement planning, two‐thirds credit adherence to a well‐defined financial plan as the primary reason for their success. Investing starts with a plan; contact us to help you develop your unique plan.
Stephanie Mackara is a Wealth Advisor at Charleston Investment Advisors. Charleston Investment Advisors is part of The Wealth Management Alliance LLC, a registered investment adviser. Though the contents of this article should not be construed as investment advice, feel free to reach out to Stephanie Mackara directly at smackara@charlestonia.com directly to discuss your specific financial situation. IRN TW 18-005
